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Axalta Net Income Falls To $95 Million As Europe Weakens And Merger Costs Climb

A record quarter in vehicle coatings lifted sales 2%, but profit fell, and leverage hit 2.1x, which Axalta calls its lowest ever.

Matteo Parrino Jonathan Ponciano

Matteo Parrino, Jonathan Ponciano

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Axalta Net Income Falls To $95 Million As Europe Weakens And Merger Costs Climb

Axalta Coating Systems, which makes paints and finishes for vehicles and industrial products, said Thursday that third-quarter net income fell to $95 million, or $0.44 a diluted share, from $110 million and $0.51 a year earlier. Sales rose 2% to $1.3 billion on a record quarter in Mobility Coatings, while weak European car-repair demand and higher costs tied to the proposed AkzoNobel merger weighed on earnings.

Europe drags on Performance Coatings

The company said the profit drop was primarily driven by an incremental $14 million in merger and acquisition-related expenses. Adjusted net income, which strips out those expenses along with other items, fell 6% to $136 million, or $0.63 a share. Lower Performance Coatings volumes and higher raw material and freight costs were the drag, partly offset by lower operating expenses and lower interest expense.

Performance Coatings sales were $818 million, down $10 million, as weaker Refinish volumes in Europe more than offset currency gains, acquisitions and better price mix. Refinish sales fell 2% to $504 million, while Industrial rose 1% to $314 million on volume growth in Asia Pacific. Segment adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $188 million, against $211 million a year earlier.

Outside Europe, demand was generally stable: sales fell low single digits in North America and rose high single digits in Latin America and Asia Pacific.

Mobility sets a sales record

Mobility Coatings, which sells to vehicle makers, posted record quarterly sales of $493 million, up 7%. Commercial Vehicle sales climbed 24% to $119 million on higher North American Class 8 truck production, and Light Vehicle sales rose 2%.

Segment adjusted EBITDA reached $94 million, a third-quarter record, with a 19.0% margin, up 100 basis points (one percentage point). Companywide adjusted EBITDA was $282 million, down 4%, at a 21.5% margin.

CEO Chris Villavarayan said the company stayed above a 20% margin despite a "more challenging operating environment."

Cash, leverage and the outlook

Free cash flow rose 3% to $92 million, even after about $21 million of incremental merger-related cash costs. Total net leverage, net debt relative to adjusted EBITDA, fell to 2.1x, the lowest in the company's history, Axalta said.

For the fourth quarter, Axalta guided to roughly flat sales, adjusted EBITDA of $254 million to $264 million and adjusted EPS of about $0.55. For the full year, it expects adjusted EBITDA of $1,100 million to $1,110 million, adjusted EPS of about $2.45 and free cash flow of about $450 million, including roughly $80 million of merger-related cash costs.

Shareholders of Axalta and AkzoNobel voted in favor of all merger resolutions on August 5. Villavarayan said the company is "confident in the significant value creation opportunity" of the proposed combination.

Axalta's full-year guidance puts free cash flow at about $450 million, with roughly $80 million of that burden coming from merger costs.

Sources

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